The Cleverness of a Trillion Dollar Coin

Harvard Professor Jeffrey Frankel explains the logic in a bizarre solution to the debt ceiling crisis.

Policy wonks have spent the last few weeks debating whether President Obama might avoid opposition to a debt ceiling increase by minting a $1 trillion coin, an option available to him thanks to a law giving him power to mint platinum money. White House spokesperson Jay Carney took the option off the table this weekend. “There are only two options to deal with the debt limit,” said Carney. “Congress can pay its bills or it can fail to act and put the nation into default.”

That’s too bad, in some sense, because “it’s a wild idea, but it’s not an insane idea,” says Jeffrey Frankel, an economics professor at Harvard University’s Kennedy School of Government. We asked Frankel to explain why the idea was a clever, if unlikely, solution:

1. A trillion dollar coin would have been a good bargaining chip.

“This isn’t the first time that the Republican Party has seized on [the vote to raise the debt ceiling] for a purpose for which it wasn’t designed,” says Frankel. Congress originally instituted the debt ceiling in order to provide greater flexibility to finance U.S. involvement in World War I — not to establish a check on federal spending. A vote to increase the debt ceiling was intended to continue spending that the Congress and the President had already approved.

“But now Republicans are using it like they have their thumb on a hand grenade, and are saying that if you don’t do what I want, I’m going to blow everyone up,” says Frankel.

But the possibility of the trillion-dollar coin puts Republicans in a weak position. “If Republicans see that the Democrats could do something like seeing this,” Frankel explains, “they’d be forced to compromise at the last minute. It’s analogous to the January fiscal cliff.”

“The goal would be not to have to use it,” Frankel adds, unless Congress refuses to vote to raise the debt ceiling and the White House is left without another option.

“In terms of the economics, it’s very clever,” says Frankel. “I can’t see any real adverse side effects. There’s a lot of misinformation out there.”

Inflation is caused by an increase in the total money supply, which is controlled by the Federal Reserve. While minting a trillion dollar coin would raise the total money supply, the Federal Reserve would be able to quickly move to offset this increase by reducing the existing money supply by a trillion dollars.

“One component goes up, and another component goes down,” explains Frankel, and the value of the dollar remains the same. “And so far, it doesn’t seem as if it would be a difficulty for the Fed to offset it.”

3. A coin trick could have a negative effect on the international perception of the U.S. — but defaulting on our loans would have an even worse effect.

“[Minting a trillion dollar coin] could rattle financial market confidence,” Frankel admits. It would certainly lower the national and international perception that the U.S. is able to reasonably resolve its fiscal problems.

But it would be even worse if Congress refused to raise the debt ceiling and the U.S. defaulted on its loans.

“I think people underestimate how much harm it would do if we defaulted,” says Frankel. The federal government’s credit rating would very likely be downgraded again, like it was following the August 2011 debt-ceiling crisis.

“And this would have a permanent, long-term effect,” Frankel explains. “The U.S. Treasury is currently borrowing at the lowest rates of anyone else in the world. If our credit is downgraded again, world lenders are going to get a little nervous, and they’re going to start asking for higher interest rates” — which will cost the U.S. in the long run.